The internal struggles of the Federal Reserve board

Jeff Horwich Aug 10, 2012

The internal struggles of the Federal Reserve board

Jeff Horwich Aug 10, 2012

Jeff Horwich: This week, the head of the Boston Federal Reserve Bank did something kind of unusual: he said what he thought. Eric Rosengren talked to the Wall Street Journal — he said he thought the Fed ought to do more to stimulate the economy right now.

Whoa. Stand back! In the traditional world of the Fed, this is high drama. Conventionally, the Fed board acts by consensus — Chairman Ben Bernanke represents them all. But there are members who aren’t quite on board with that “consensus.” And lately those folks seem more vocal — usually through speeches, occasionally through media interviews.

Joe Gagnon has held a number of high-ranking staff jobs at the Federal Reserve Board, most recently in 2009. Now he’s a senior fellow at the Peterson Institute for International Economics. Good to talk with you.

Joe Gagnon: Good to be here, Jeff.

Horwich: So Joe, who are just a couple, of the occasionally dissenting voices on the Fed Board right now?

Gagnon: Well there’s a group of people who are often called hawks, because they tend to be in favor of relatively tighter monetary policy then the rest of the committee. Right now, one of that group that has a vote is Jeffery Lacker, president of the Richmond Fed. Lately, there’s been a pulling away of a camp you could call doves, that are more outspokenly dovish then the chairman and I think Eric Rosengren is one of those and another one is Charles Evans, president of the Chicago Fed.

Horwich: There an unusual amount of drama in the board right now?

Gagnon: These meetings aren’t terribly dramatic — they tend to be very cordial and respectful. But I do think — it does seem to me, reading from the outside — that there is more disagreement now than usual.

Horwich: If things are a little more vibrant, if we’re getting a better glimpse, perhaps, of occasional discord on policy within the board, what do you sense is Chairman Bernanke’s take on that?

Gagnon: A little bit. I think it started with — you definitely saw a progression from Volcker, who tried to suppress dissent, to Greenspan, who tolerated dissent, to Bernanke, who tolerates it or even encourages it more. The one thing I would say is that Bernanke seems to really respect the whole opinions of the committee, and would pay some price to get unanimity, or at least a large majority when it comes time to vote. So I think he isn’t the kind of chairman who going to push through his narrow agenda with a narrow majority at all costs. 

Horwich: If this pattern of gradually increasing amounts of dissent on the board continues, is it possible that the Fed board stalemate at some point?

Gagnon:  So, what you could get is dissents on both sides. Then the question is what if there wasn’t a majority, what if it was split evenly in a third, a third, a third for three different policies, what would they do? I guess they would probably have to do something in the middle; two of the groups would have to reach some agreement in which they could pull together a majority. It would be very unusual and I’ve never seen it before.

Horwich: On the one hand, it seems natural that the Fed board would reflect some of the same passions and divisions that hold sway in the general public, right? On the other, should they be above all that somehow?

Gagnon: Well, I think they should be above all that, and I think surprisingly, they are — more than you would think. That’s one of the interesting things that I saw as an insider, how really all of these members are really thinking about the greater good. You never hear politics in the room, and frankly, I never even saw decisions or votes that I thought could have been explained by ulterior political motives that were not in line with what I thought that person really thought was the best common good.

Horwich: Joe Gagnon, senior fellow at the Peterson Institute for International Economics. Thanks very much.

Gagnon: You’re welcome.

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